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Business News

Inflation rate leaps to 4.5 per cent

Duty rises in the Budget, soaring air fares and a surge in petrol pump prices have driven inflation to its highest level in two-and-a-half years.

The consumer prices index (CPI) rate of inflation increased to a higher-than-expected 4.5% in April from 4% in March, the Office for National Statistics (ONS) said today.

In a letter to Chancellor George Osborne, Bank of England governor Mervyn King blamed the spike in inflation on January's VAT increase to 20% and higher energy and import prices - but said without these factors inflation would have been "substantially lower" and below the Government's 2% target.

The increase in the cost of living has signalled a further squeeze on consumer spending power. Figures released tomorrow are expected to show average weekly earnings grew by 2.3% to 2.4% in the three months to March.

The ONS said core inflation, which strips out more volatile sectors such as food, energy, alcohol and tobacco, hit 3.7% - a record high since records began in January 1997.

Transport prices rose by 2.8% between March and April, driven by a 29% increase in air travel and a 22.3% surge in sea fares.

However, the impact of air and sea fares on transport costs is likely to drop off this month, the ONS said, applying downward pressure on the overall rate of inflation.

Fuel also lifted transport costs as petrol pump prices rose by 1.6% to reach record levels of £1.34 per litre for petrol and £1.41 per litre for diesel.

The rise in alcohol and tobacco costs, introduced in the last Budget in March, was a record increase between any two months.

Economists said the hike in inflation was likely to step up pressure on the Bank's Monetary Policy Committee (MPC) to lift interest rates from their historic low.

But any calls for a rate hike to curb soaring inflation are likely to be ignored, as Mr King and his fellow MPC members have already said they expect inflation to peak at 5% later this year before falling back to the target throughout 2012 and into 2013.

Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, said the Bank was still likely to put off a rate hike until November.

He said: "Though the MPC will derive no pleasure from seeing inflation being so high, there is nothing in these figures to suggest that their central forecast - of inflation easing back to target towards the end of next year - will not play out so there is no reason to expect them to move any earlier."

The Bank governor was required to write a letter to the Chancellor as inflation has been 1% higher than the Government target for the last three months.

It was the sixth successive quarter in which Mr King has had to write such a letter.

The Bank has consistently blamed temporary price shocks, such as the boost to crude oil prices in recent months, for high inflation.

But in his letter Mr King warned: "Continuing volatility in energy and commodity prices makes it difficult to be sure when inflation will return to the target."

Other measures of inflation dropped, with the Retail Prices Index (RPI) rate falling to 5.2% in April from 5.3% in March.

The fall came as a drop in council tax, car insurance and house prices was included in the RPI figure but does not feature in the CPI calculation.

But union leaders said today's figures meant "misery for hardworking families" and called for a change of strategy from the Government.

Dave Prentis, Unison general secretary, said: "Today's fractional fall in retail price inflation will not relieve the pain of family budgets.

"We know many low paid workers, for example care and health care assistants, already struggle with heavy debt."

But in his response to Mr King, the Chancellor said the Government's austerity measures were giving the Bank the space it needed to target low inflation.